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Rung 2 of 5 · The cash flow statement

The cash flow statement, and why net income isn't cash

The one financial statement that shows where the cash went, and how to rebuild it from net income.

For educational purposes only. This material is general education about managing cash flow. It isn't legal, tax, accounting, lending, or investment advice, and reading it doesn't make you our client. Every business is different. Before you act on anything here, confirm it with your attorney, your CPA or tax advisor, your lender, and any other professional who advises your company. See the terms of use.

The cash flow statement is one of the three core financial statements. It sorts every dollar into three buckets.

Operating · CFOCollecting from customers, paying suppliers, staff, taxes and interest.
Investing · CFIBuying or selling long-term assets: trucks, buildings, software, whole companies.
Financing · CFFBorrowing, repaying debt, issuing stock, paying dividends or distributions.

Most companies use the indirect method. Start with net income, add back non-cash charges like depreciation, then adjust for working capital. If receivables rise $1M, you booked $1M of sales you didn't collect, so CFO drops $1M. If payables rise $1M, you held onto supplier cash, so CFO rises $1M.

Healthy pattern: operating cash funds investment. A company that borrows every year to cover operating shortfalls depends on its lender to stay open.

Indirect method builderFigures in $K · a rise in an asset uses cash
Operating cash flow
Free cash flow
Net change in cash
Where the numbers come from

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